Stock Ideas

Studied Newgen. Liked the potential of underlying industry growth here & Newgen’s positioning to capture it. Don’t want to write a full thesis, just wanted to highlight a few key points.

1. SI tie up efforts to play out in medium term revenue growth – One of the key reasons revenue growth can accelerate and be on the higher side, say 20-25% cagr, is due to the last few years efforts(already done) of tying up with system integrators. Think kpmg, E&Y, accenture etc. They are the ones who have a richer relationship with large clients, who really help in getting an IT products co, business. Went through the last 3-4 years transcripts of peers Appian corp, Pegasystems. 1 clear point which stood out was, Sis you really need them if you want to grow significantly, esp when it comes to getting large deals or traction with fortune 500/2000 cos. Interestingly, Appian has been getting majority of new business from SIs, whereas for Newgen its only 20%. Their scale is 1/4th of Appian, and so far they gotten business from their own direct sales force. Given the revenue growth potential from Sis over the next 3-5 years, growth rates can be material perhaps.

   Appian corp:
   “Partners delivered more than 70% of our new logos for the year.”
“Partners continue to be a larger part of our ecosystem and are increasingly helping us sell more software.
   
   “I’m happy to give our partners credit for the increase in net new logos. I think they deserve it, and they’re going to be a powerful engine for us in adding logos going forward.”
“And we eagerly turn that over to the partners who give us the complementary skills that we require, the access, the credibility, the reach and the strong team of trained service providers that dwarfs what we are capable of fielding ourselves.”
   
   “Partners helping us get business going very well. They’re creating IP, they’re making the pace. They’re carrying the deals for a lot of the – they’re doing a lot of the heavy lifting. And the results are so promising and I now consider this to be one of our best up-and-coming verticals. That’s an example of the kind of help we’re getting today from partners, the kind of win-win they’re seeing working with us. It’s of a different league than we saw even 12 months ago.”

   Pegasystems:
   “We had relationships with our partners over the years, but more in an execution way. They did the implementations, they were the global system integrator, they had Pega-certified resources, we worked well with them, but not in a selling capacity. We never went to an Accenture, for example, as just one example of a partner and actually said, hey, we want to be – we want to work together on actually opportunities where Pega and Accenture can actually help our clients. Same thing with Cognizant, with Capgemini, with Ernst & Young, go through the list of those. Those SIs have tremendous relationships with our clients. In many cases, they are better relationships than we would ever have because they’re living with those clients and helping them on their digital transformation.”

   Newgen:
   “have also entered into global strategic alliances to further expand our partner network.”
   “see possibilities of accelerated growth in acquisition of new logos both directly as well as through partners”
   “the other most important driver for us is to build the global partner ecosystem, most of the product companies beyond a size of $100 to $ 200 million do grow strongly through a partner ecosystem and that is what we are investing in and we hope that in the next 4 to 5 years”
   “GSI very small part of business, coming in few next three years this can be a substantial part of our business.”
   “Why are GSIs partnering with us: it is true, GSIs traditionally they have been carrying products, the ones we have, like, they have products from Appian, Pega, Open Text and they have been caring to these global customers. What has changed over a period, first of all, organically over the last five, seven years, we have generated a lot of success stories with the GSIs on different accounts across the globe. So, their confidence in our product and platform has really grown. We have excellent success cases. Finally, the GSIs also are looking at a great piece of technology. But beyond that, they are also looking at the customer success, because they have a surety that the use cases will get fulfilled. So, what are the happened, as a part of that our relationships have really grown. So, we are concentrating on four to five GSIs where we are having more strategic tie ups when they are taking our products to their practice areas, having kind of sales targets on our products. And now why should they take our product vis-à-vis competitors? You know, as Mr. Nigam clarified in his call, because of the value proposition. We are one of the few players who have multiple products from the same stable build on the same platform and technology which are used in a single digital transformation case. So, what happens is, the complexity for the end customer and the GSI drastically reduces, and thus their cost of ownership. Very, very compelling value proposition. And it’s not an easy journey to say why GSI would take our product, but I think the hard work has been done over five, six years. Now, we are seeing the green shoots of that, what we have invested over five, six years with these GSIs, building the credibility. So, we are one of the few companies who are consistently in Gartner and Forrester Magic Quadrants, that gives the comfort both to the customer and the GSI.”

2. TAM & the potential of Low code market growing as a tailwind for Newgen– The biggest issue for us investors to study IT cos is, since most of us don’t have an IT background, we really don’t have a sense & feel for the products. Figuring out opportunity size (actual one, not a random blown up over the top figure), competitive positioning and market share is easier said than done.

   Newgen:
   “we have shown a continued performance of around 20% growth rate over last many years. I think organically we have been able to do that and with our push in mature market and the GSI initiatives, we are expecting to even push it up higher because for our business, the availability of market is not a challenge. So we think the addressable market especially with the Low-Code initiative and the interest in digital we think the growth in overall available market is going to be high. So we do expect that we can even push it up than our traditional growth rates.”
   “Addressable market – overall addressable market of the ECM, BPM and CCM which are the traditional product line which are very well tracked by Gartner and other guys. = $20bn. 7-8% cagr. but the Low-Code initiative which has been the recent take on the digital companies, I think that has expanded the market size to a much larger. Cant quantify but as big as $60 to $200 billion additional market”

   Appian corp:
   “The profile of low-code has risen substantially over the past year for reasons we’ve discussed on previous calls. Forrester predicts that 75% of development shops will use low-code platforms by the end of 2021.”
   “The macro answer is we’re a 30% grower. And I don’t want to indicate that I expect anything other than that”
   “The TAM, as you guys know, no matter how you slice it, is massive.”
   “at 2020 and you say, well, that’s the year that low-code took off, low-code is a thing right now, it’s a thing in mission-critical applications”

   Pegasystems:
   “TAM – look at a company like Salesforce, they’ll tell you that the market – that their TAM right now is over $100 billion, growing to $200 billion, just round numbers, right? It’s large. I mean they have something like 25% of the market share of the markets that they’re in, right?
   So when you look at our markets, we’re – our TAM, we don’t have the same addressable market that a company like Salesforce has. Remember, they’re getting that data from IDC, from Gartner, from Forrester. They’re not making that up. They’re getting – same sources we go to. So what we did, we went to those same sources that all of our competitors go to. But we focused on the organizations that we target, which tend to be the larger organizations in our core verticals. When you – with just quick math, that kind of cuts the market down by 30% to 50% in terms of the TAM of what you might see from a company like Microsoft or Salesforce in terms of what they could address because we don’t go down market, we don’t sell to every single organization, we don’t sell to every single vertical. So we try to be realistic about the fact that our TAM is something like $60 billion, $65 billion, $70 billion, growing to over $100 billion. Now the reason why I gloss over that sometimes is we’re $1 billion, and we’re talking about a TAM that’s approaching $100 billion. So for us to double our business really isn’t even scratching the surface on disrupting or cannibalizing the market. That’s the reason why I don’t get into a lot of science around sizing. It’s so large that there’s plenty of room for us to double, triple, quintuple our business over – in the coming years. So I think we’re – that’s really not the restricter. The restricter is us executing, right? We just need to execute well. I think the market is plenty big.”

3. Competitive positioning – read a bunch of gartner & forrester reports (available in plenty on Newgen & peer sites). Really helps in getting some sense on strengths & weakness for each co’s product. After seeing no of reviews, rating score, comments in reviews, number of competitors on list – Newgen seems decently placed, I would categorize in a mid to upper tier vs peers.
   The 2 traction points are a well-integrated product suite (organically built, peers have often used acquisitions to fix gaps, however this leaves room for integration failures & frustration for the client) + value for money offering (cheaper offerings, price competitive). Weaknesses mentioned are limited presence in mature markets + lack of a developer ecosystem.
   Making headway in mature markets + tie ups with Sis is the way forward for Newgen to get stronger and scale up.

Interestingly, on checking employee reviews, its clear most mention an outdated tech stack for Newgen. This is a negative, and one needs to keep tracking industry reports from Gartner & forrester for Newgen’s positioning on its product vs peers.

Regards,

Anubhav Goel

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Disclaimer:
Sirius Advisors is regulated by the Securities and Exchange Board of India as a provider of Portfolio
Management Services.

The information provided on this website does not, and is not intended to, constitute investment advice; instead, all information, content, and materials available on this site are for general informational purposes only.  Information on this website may not constitute the most up-to-date information. The enclosed material is neither investment research, nor investment advice. Sirius Advisors does not seek payment for or business from this email in any shape or form. The contents and information in this document may include inaccuracies or typographical errors and all liability with respect to actions taken or not taken based on the contents of this site are hereby expressly disclaimed.  The content on this website is provided “as is;” no representations are made that the content is error-free.

No reader, user, or browser of this site should act or refrain from acting on the basis of information on this [site/newsletter] without first seeking independent advice in that regard. Use of, and access to, this website or any of the links or resources contained within the site do not create an portfolio manager -client relationship between the reader, user, or browser and website authors, contributors and their respective employers.  The views expressed at, or through, this site are those of the individual authors writing in their individual capacities only.

Stock Ideas

Have been tracking Lupin for many years & have remained invested. There have been plenty of ups & downs over the years, the prevailing narrative is that the management has disappointed in execution & Lupin has lost its rigor and is severely underperforming vs other pharma cos. I partially agree to this thesis, the list of disappointments is many, what’s gone underappreciated is, if we look beyond the hood of reported nos till date, management is committed to scaling up profitably & lack of intent & energy cant certainly be a reason to write them off.

1. Specialty – outcomes (good money spent in R&D + acquiring assets + front force costs in US) have been way below par. On one hand, I do complement the management strategy of walking on the tough path of trying to make a mark in US specialty. I think Sun + Lupin both understood that to be a serious player in US, and to fructify their longer term scaling plans, they will have to bear serious pain on this. They had the Balance Sheet strength & cash flows, and in my view they took the right call. Now it’s not great for us short sighted investors (has not worked out well for me so far), next 2-3 year earnings & ROCE get affected’, but this is precisely the reason why they have achieved this level of scale over past 2 decades. The good news is Lupin has shown its willingness to take correction action & adapt, has cut down its specialty operation in the last few quarters, are open to selling Solosec, which means the drag on margins from this area is no longer going to be there.
2. US FDA – Lupin went from having among the best track record upto 2015-2016 vs its peers, to an average or subpar track record today. This clearly was a big disappointment in hindsight. Hopefully, we are at the end of the tunnel on this. Further disappointments can’t be ruled out, but are unlikely. It’s a matter of time before we get good news here (trigger).
3. US portfolio – their approval on albuterol, filing of Spiriva, looking at their pipeline in general, R&D strength of Lupin is above par. 1 year forward PE can’t capture this. Unlike say a Cipla which is heavily focused on inhalation, Lupin’s approach vs its peers, for US is to have a relatively more broad diversified array of plays. Whether it is complex generics or inhalation or biosimilar assets or upcoming complex injectable pipeline, I like their approach to diversify risk and not be overly dependent on a few products/areas. This bodes well for a Long Term investor. High spending on R&D is needed, and it does not shun away from taking pragmatic favourable risk reward large value bets and spending money on it. The intent to grow in US is clearly there. I am not in the ‘Buy Indian only Pharma stories & ignore export’ camp. Cycles peers. Thankfully, they have taken course correction and seem to be balancing their energies when it comes to the US vs India trade-off. I feel we will see acquisitions soon when it comes to the Indian market for Lupin.

Reported nos of Lupin in recent years is not much to talk about. US sales has been flat, margins have been compressed, earnings growth has just not been there. R&D spending, lack of growth, rising overheads, underutilized capacity is curbing profits/Roic.​Looking beyond reported nos:

1. Divested Japan operation, lightened BS. Sound capital allocation policies overall.
2. Shown its mettle in moving up the value chain and ability to get really tough approvals like Albuterol. Spiriva approval (CY22e) can be a big trigger, a high value complex product.
3. Course corrected on US specialty spends.
4. Renewed focus on India. Launch of new products. Have the scale to drive faster growth.
5. Very conservative on accounting, timely write-offs taken. Pharma only business for the promoters, have rubbished the recent news around them exiting.

Have shown an ‘ability to suffer’ mindset keeping LT goals in mind.

Margin expansion potential – Given the underutilized capacity, Gross block build up w/out subsequent sales, there is good headroom for margins to go up over time as growth comes. Management at different times have given various indications for what margins can be down the road. 21-22% to 25-26%, from a thread of interviews & concalls. Currently at 16-17%. Historically, Lupin enjoyed 24-28% margins between FY13-FY17. That was the period when they were riding high on exclusive US products with high profitability. Extent of upside will be contingent on what margins they eventually post as operating leverage comes.

Nice set up at the current juncture for triggers/earnings to play out over the next 3 years.
US FDA plants resolution(will aid in margin expansion as it makes it easier on the supply chain), new Indian launches, Spiriva

approval, ramp up of albuterol, US generics pricing pressure curtailing, margin expansion potential with time, inorganic moves, recent diagnostics entry(good one I feel). They have also upped the management bandwidth with some key hires made over past 2 years (Check announcements).

Given the cyclicality of nos in Largecap Pharma due to volatile profits, a good way to check valuation on cos is EV/Book. PEs can get misleading here. (930 cmp, taken Kotak estimates for FY22 & FY23)

Regards,

Anubhav Goel

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Disclaimer:
Sirius Advisors is regulated by the Securities and Exchange Board of India as a provider of Portfolio
Management Services.

The information provided on this website does not, and is not intended to, constitute investment advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date information. The enclosed material is neither investment research, nor investment advice. Sirius Advisors does not seek payment for or business from this email in any shape or form. The contents and information in this document may include inaccuracies or typographical errors and all liability with respect to actions taken or not taken based on the contents of this site are hereby expressly disclaimed. The content on this website is provided “as is;” no representations are made that the content is error-free.

No reader, user, or browser of this site should act or refrain from acting on the basis of information on this [site/newsletter] without first seeking independent advice in that regard. Use of, and access to, this website or any of the links or resources contained within the site do not create an portfolio manager -client relationship between the reader, user, or browser and website authors, contributors and their respective employers. The views expressed at, or through, this site are those of the individual authors writing in their individual capacities only.

Stock Ideas

Pan India market leader in women’s ethnic wear category, Mx – highest in its category, but low overall given a 20-30% share occupied by organised players.

Why we like it, and our thoughts on certain key points.

Strong organic growth underappreciated

Heavy ramp up in store count, focus on being product centric vs channel centric, multi-channel approach, has led to an impressive ~37% sales cagr for FY13-FY20. It’s difficult to grow so fast without fumbling, testament to their execution skills. Retail comes down to execution, which in turn depends on gePng the supply chain right backed by a good product fit. Discretionary spends in general have been under pressure in India for the past 3-4 years, and we think once the up cycle is strongly underway, the potential remains to surprise on the upside on sales growth. The company admittedly has an extensive ESOP policy (~10-11% dilution over next 3 years), but growth has not come on the back of increasing debt. Balance sheet has remained debt light.

 

 

Balance Sheet strength, Gross margin vs Lower payable days, approach towards expansion

Manufacturing is 100% outsourced, while design is 100% in-house. 40% of its stores are run by franchisees. Building an agile supply chain in ethnic wear is relatively tough, given a high number of fabrics+trim materials to sort through, to ensure a good product fit year ader year. Navigating the seasonality in the business i.e fashion trends, separates the winners from the losers over Hme. We feel the company has embarked on a correct strategy of paying its vendors before time, supporting them, shiding vendors to low cost areas away from Delhi-Ncr. While this may elevate the Working Capital due to lower payable days, the bigger priority is to ensure a smoothly running efficient supply chain. That is key!

Instead, the company has focused on lower discounting & ensuring GM% is high. While larger fashion companies operate on gross margins of 50-55%, Tcns is at 62-63% gross margin.

 

 

The combination of minimal capex, higher GM%, franchisee share %, lower payable days has resulted in higher ROIC% vs peers.

“we are not in a standard product business where we sell the same thing season ader season = in our business at times depending upon fabric, fashion, depending upon whether you are selling one piece dress or you are selling three different pieces, your ASPs and volumes both can go in any direction, but this is something which is fashion. A person might buy three different pieces to make a combination or another person might get one dress and that is how consumers behave.”

“we have taken a route of slightly protecting our gross margins.”

“our focus is to get products on time, we think the gain from selling it full price would be much more than whatever inventory carrying cost that we have.”

“we have repeatedly said that we are trying to set up a low-cost base and we are also using cash on our balance sheet to get better rates for our products and that gain is reflected in gross margin. We are deliberately paying creditors before time, this is something that we actually can reverse any time”

“We have been paying our suppliers ahead of time which can be reviewed as per current situation. However, we will continue to be equitable partners and will continue to support our vendors.”

“we have been able to negotiate better in terms of fabric cost by giving better credit terms.”

“if you look at our working capital days generally it is about 100 days to 120 days and this is what we have been able to maintain over seasons, so last year, this year all these are in the similar range.”

“So, as a company we are focused on gross margins because we believe that in the long term that is what protects the brand integrity. Also, rather than just gaining revenue share in the short term by selling stuff on discount, which is not anyway great for margins, it’s better to control inventory and try to increase your full price sales. So lot of the efforts that the company is taking is on these lines, we have a rethink on the way we are creating the merchandise mix we are rethinking the way we are thinking of supply chain. So, for example today lots of our products are getting delivered in 60 days/in less than 60 days, which was not the case earlier.”

 

 

Valuations

Prevailing valuations provide comfort. Retail is an extremely tough business, and we certainly don’t want to fool ourselves on the historical unit economics of this industry, sustainability of franchises, constant evolving trends, fading away of very good cos & managements. It’s tough!

Interestingly, Branded apparel retail was a space which enjoyed premium multiples in 2016-2018. On a forward basis, cos traded at 4-5x EV/Sales & 18-20x EV/Ebitda. Today, Tcns trades at ~2.5x EV/Sales & ~14x EV/Ebitda FY23. While we are cognizant of the risks prevailing in this industry, we do feel the risk-reward is in our favour.

 

 

1. Stable, incentivized & professional management team: The promoters have taken a backseat. Bulk of the executive team has been with the company for over eight years, carry esops. The MD has been with the company since 2011 & owns ~6%.
2. Proactive focused approach towards online: Has not been caught off-guard post covid, unlike other retailers who were not focused towards the digital channel.

   Online share to mix: FY16 7%, FY19 12%, FY20 10%, FY21 27%. Is growing its share of online sales from own websites vs. primarily 3rd party earlier.

   “Now, if you look at this channel right now, it’s contributing to about 23%, in midterm, about three years’ time, it should anywhere between at least 1/4 to 1/3 of the total sales. And we ourselves, as a company, are trying to push this”

3. Inorganic potential: Tcns has primarily 3 brands W(introduced in 2002), Aurelia(introduced in 2009), Wishful(introduced in 2006). Now trying to grow Elleven (coordinates foray), raise share of footwear & accessories. Healthy cash on the BS.

   “one of the stated objectives for us has been inorganic growth; we see many small brands with tremendous potential which due to reasons of managerial bandwidth or probably risk appetite or financial constraints could not scale up. While we have seen multiple attractive assets in the past, we could not align on the right pricing. We see possibility of such assets coming at the right price now. Our industry is extremely fragmented with multiple small players with limited financial resources.”

4. Shift towards casual/light wear(WFM) vs heavy ethnic risk: Product offerings of W (Key revenue contributor ~55-60%) are inclined toward Indo-western fusion vs contemporary ethnic. Biba for example has a higher share of contemporary ethnic.

Regards,
Sirius Advisors

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Disclaimer:

Sirius Advisors is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services.

The information provided on this website does not, and is not intended to, constitute investment advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date information. The enclosed material is neither investment research, nor investment advice. Sirius Advisors does not seek payment for or business from this email in any shape or form. The contents and information in this document may include inaccuracies or typographical errors and all liability with respect to actions taken or not taken based on the contents of this site are hereby expressly disclaimed. The content on this website is provided “as is;” no representations are made that the content is error-free.

No reader, user, or browser of this site should act or refrain from acting on the basis of information on this [site/newsletter] without first seeking independent advice in that regard. Use of, and access to, this website or any of the links or resources contained within the site do not create an portfolio manager -client relationship between the reader, user, or browser and website authors, contributors and their respective employers.  The views expressed at, or through, this site are those of the individual authors writing in their individual capacities only.